The Business Spectator’s Robert Gottliebsen and Stephen Bartholomeus have an interesting interview with Origin Energy’s Grant King, looking at the impact of "export parity" on gas and coal prices in eastern Australia (amongst other things) - Q&A: Origin’s Grant King.

Robert Gottliebsen: Grant, looking at the industry there are four major projects in Queensland. Do you think it’s a possibility that they won’t all find enough gas and that there may be pressure on the local gas supplies as the export Queensland contracts are then forced to try and cover any shortfall?

GK: Look, our view, and again I’ve said this quite publically for quite some time, that we believe the resource would support, you know, five or six LNG trains being built in Gladstone and that’s what’s happening. So there’s more than sufficient resource to support that capital investment. As for whether the resource is sort of perfectly aligned within each of the joint ventures, or is there a need to be in the longer term some borrow and loan against the projects to make sure that those LNG trains remain full, my view is that it’s quite likely in the fullness of time that the projects will find a way of sharing amongst themselves on a purely commercial basis the resource that produces most value, you know, in respect of keeping those trains full, so I think that’s quite likely in the years ahead. Again, the deeper question you asked in respect of the impact of that on the domestic gas market. I think the two important points to make are that what the LNG industry has shown in respect of natural gas resources in Queensland, in this case CSG, is that as you move prices towards export parity, the resource base does expand and as that perception of that expanding resource base grows, what you’re seeing is other companies invest in exploration, for example, in other sources of gas as well, so we’re seeing the industry now test shale gas plays, for example, in the Cooper Basin, other unconventional gas plays as well as coal seam gas. So, what we expect as gas prices do begin to reflect that export parity is that the resource base will actually expand even further, and our view is that, and this might sound somewhat of a paradox, but our view is that eastern Australia, you know, can now look at a very long gas position, and it’s a bit like the emergence of the shale gas industry in the US where compared with five or ten years ago the US can now look at a very long period of gas self sufficiency.

RG: What’s the difference between the export prices as they currently are and what the local prices are in percentage terms? Is it ten per cent?

GK: Oh no, it’s more than that. I mean the best way of seeing that is to say that in Western Australia where there’s been an LNG channel to market for quite some time, contract gas prices are probably more typically in that six to eight dollar range. In eastern Australia because gas has competed with coal at the margin historically in the power generation sector, gas prices when coal was cheap were more typically in the three to four dollar range. But what is happening is that coal is also moving toward export parity, obviously if you export coal, you get export parity. But what will happen through time is that coal used for domestic generation in Australia as well will move towards export parity. So, you’re seeing these two trends. You’re seeing both of the main thermal fuels in eastern Australia move progressively towards export parity and one tends to support the other with increasing coal prices also feeding back into the value of natural gas as well.

RG: You mentioned two prices for local gas in Australia. What’s the export parity price equivalent to those?

GK: Well, the Western Australia price you’d have to say is export parity because the existence of an LNG export channel in Western Australia tells you that that price range is about six to eight dollars.

RG: And then in eastern Australia it’s in the three to four dollar price range?

GK: It’s historically been in the three to four dollar range when coal was cheap. I believe you’ll find gas prices have started to move along already, but that was historically where they were.

RG: So, it’s between 33 and 50 per cent higher?

GK: Correct.

RG:So , as we move to gas fired power stations on the eastern seaboard as seems likely, then that’s the sort of gas price increase that we’re going to look for?

GK: What we’re going to see and if I could perhaps take your question and extend the point a little bit, in terms of wholesale cost of fuel the fuels we use in Australia for our power generation are traditionally coal of course, gas increasingly, but also renewables. So, if you think about those three fuels, it’s worth thinking about what’s driving the underlying costs of those fuels. Now, in the case of coal and gas, it’s simply export parity and the broader view that one would take from a national wealth perspective is that our resources ought to receive their true value in the market and that’s in the greater interests of the country. So, we’re seeing the move towards export parity in respect of our fossil fuels. In respect of our renewable fuels, which in a sense you don’t export, they are generally much more expensive to develop and to date their development is supported through mandatory schemes like the renewable energy target. They are still much more expensive than fossil fuels at either historical costs or export parity prices. So, in the normal course those fuels will still be competitive and we would expect to see continued use of coal and gas with the other overlay of course that sitting on top of that now is, potentially at least, a carbon price of $23 a tonne and that will also affect which fuels are most competitive to use for which purpose.

SB: There’s a kind of perverse benefit in higher prices, isn’t there? Consumers will see high gas prices as a negative, but in fact it should bring more base load and combined cycle capacity into the market.

GK: That’s a very good observation and the point I’m trying to make is that it does sound paradoxical, but the reality is that if we move towards export parity, our resource base expands enormously and it’s already stimulating additional exploration, and my view is we will find that we’ve got even more gas resources available. So, you know, our view is gas has a great role to play. In the period through to 2020 that role of course is somewhat affected by the existence of the mandatory renewable energy target which will mean that a fair bit of the investment in generation and a fair bit of the fuel used for generation between now and 2020 will be driven by that renewable investment target, and gas through that period will play a role to firm the interruptibility of that fuel. So, as you know, if wind primarily is the fuel for the renewable energy target, then it will need to be firmed. So, for the period through to 2020 gas will play a very significant role in firming that interruptible fuel and beyond 2020 it’ll depend a lot on whether a carbon price exists and what that price is as to what mix of fuels, coal, gas, renewables, drives generation investment beyond 2020.